VeriFone Seen as Google Target as Shares Fall: Real M&A
VeriFone Systems Inc. (PAY) has gotten $2 billion cheaper for acquirers coveting a source of revenue that’s booming with almost every swipe of a credit card.
VeriFone, the largest U.S. provider of in-store terminals that process credit and debit card payments, has declined 46 percent since April amid concern about competition from startup Square Inc. in the market to handle payments via smartphones and tablets. The $3.2 billion company is still projected to boost sales 79 percent by 2014, the most of any provider of transaction-management systems valued at $500 million or more, according to data compiled by Bloomberg.
With the industry’s lowest price-earnings ratio and customers ranging from cab drivers to retailers, VeriFone may lure bidders including Google Inc. (GOOG), which created a mobile- payment service, and PayPal owner EBay Inc., said SunTrust Robinson Humphrey Inc. As VeriFone offers technology for users to pay by tapping a phone near a cash register, a buyer would gain a foothold in mobile-payment transactions that Juniper Research Ltd. estimates will rise almost fourfold to $1.3 trillion by 2017. A takeover should fetch at least $50 a share, a 70 percent premium, said Thrivent Financial for Lutherans.
“Just on the valuation alone it’s attractive” for a takeover, David Rudow, a Minneapolis-based analyst at Thrivent, which oversees $73 billion including VeriFone shares, said in a telephone interview. “This is a company that is very well positioned. They’re in one of the most exciting areas of technology right now.”
Andy Payment, a spokesman for San Jose, California-based VeriFone, said the company doesn’t comment on speculation.
VeriFone says it has designed systems to handle the shift to electronic payments from cash and checks since 1981. In 1997, it was acquired by Hewlett-Packard Co., then sold to Gores Technology Group in 2001. Its most recent initial public offering was in 2005.
In recent years, VeriFone’s hold on the card-terminals market has become threatened by newcomers such as Square, the closely held startup from Twitter Inc. co-founder Jack Dorsey. Other entrants include PayPal, Intuit Inc. (INTU), Groupon Inc. (GRPN) and, most recently, Bank of America Corp.
Accessories are now being marketed that turn smartphones and tablets into card-accepting devices that compete with the traditional in-store devices offered by VeriFone. VeriFone has rolled out its own line of mobile accessories and services, called SAIL.
“The fear is that these new emerging technologies are going to be a big problem for VeriFone,” Tom Taulli, who analyzes acquisitions for Los Angeles-based IPOPlaybook.com, said in a phone interview. “When you are the incumbent, you have the most to lose.”
VeriFone shares have dropped 46 percent from their peak this year of $54.45 in April, wiping out $2.6 billion in market value as the company’s revenue fell short of some analysts’ estimates and investors worried about increasing competition.
After hitting a record low valuation of 9.8 times profit in September, the company now trades at a price-earnings ratio of 10.4 times, data compiled by Bloomberg show. That’s the lowest multiple among providers of transaction-management services with market values higher than $500 million, the data show.
“The stock is inherently undervalued,” Andrew Jeffrey, a San Francisco-based analyst at SunTrust, said in a phone interview. “The perceived threat from companies like Square is much greater than the actual threat. They have a lot to offer to potential acquirers.”
VeriFone would give a buyer both relationships with physical stores and expertise in the expanding market for new mobile-payment technologies. VeriFone is the global leader in the market for electronic payment terminals for merchants, with about 45 percent market share last year, according to Frost & Sullivan.
“They have such a strategic customer base -- it’s a huge value,” Susan Eustis, chief executive officer of WinterGreen Research Inc. in Lexington, Massachusetts, said in a phone interview. “There’s such an uproar in this business right now. There’s a ton of companies that need this functionality.”
VeriFone may benefit financially during the next three to five years as merchants replace credit-card terminals with newer technologies, Dave Kaminsky, an analyst at Mercator Advisory Group Inc., said in a phone interview.
VeriFone’s revenue may increase 79 percent to $2.34 billion in 2014 from last year’s level, according to analysts’ estimates compiled by Bloomberg. That’s the highest projected growth rate of any similar-sized company in the industry and compares with a median for the group of 24 percent, the data show.
A buyer such as Mountain View, California-based Google could leverage VeriFone’s terminals to more quickly spread its own mobile-wallet services, said Meghna Ladha, a New York-based analyst at Susquehanna International Group LLP. The Google Wallet application lets consumers pay for goods in stores by tapping a smartphone on a device at the cash register.
VeriFone is already partnered with Google. It installed special software that supports Google Wallet payments into new terminals it sells to merchants. Its new systems can accept payments based on a technology called near field communication, or NFC. An NFC chip built into the phone communicates with a credit-card terminal with just a tap, an upgrade from the magnetic stripe on a plastic card that was invented in 1960.
Nate Tyler, a spokesman for Google, which has a market value of $212 billion, declined to comment on speculation.
EBay (EBAY), with a market value of $60 billion, may also weigh a bid for VeriFone, according to SunTrust’s Jeffrey and Rick Oglesby, a Mesa, Arizona-based analyst at Aite Group LLC. In addition to partnering on Google Wallet, VeriFone has worked with EBay’s online payment service PayPal and ISIS, a joint venture between AT&T Inc. (T), Verizon Wireless and T-Mobile USA, to allow its terminals to accept their mobile-payment services.
PayPal has started providing users with cards with which they can shop in physical stores. Consumers can also pay with their mobile phone number and PIN. PayPal is working to expand its network of merchants that will accept its payments beyond the 10 major U.S. retailers with more than 7,000 locations that did so as of October.
“VeriFone is in a pretty good position, in being an enabler in all things mobile,” Oglesby said in a phone interview. “It’s a pretty attractive target.”
PayPal spokesman Anuj Nayar declined to comment.
Other potential buyers could include cash-register makers such as NCR Corp. (NCR) or International Business Machines Corp. (IBM) as the companies try to protect their existing business and extend into the fast-growing market for mobile payments, Richard Crone, who heads Crone Consulting LLC, which specializes in emerging payment technologies, said in a phone interview.
“We’ve already seen some consolidation in this industry, and many are expecting cell phone and tablet technology to really change” point of sale, Crone said. Whether an acquisition will happen “will be sorted out in the next three to six months.” Clint Roswell, a spokesman for Armonk, New York-based IBM, and Kevin Ruane, a spokesman for Duluth, Georgia-based NCR, didn’t respond to phone calls seeking comment.
Thrivent’s Rudow, who said buyers could include Google and EBay, estimates VeriFone should command at least $50 a share in a sale, a 70 percent premium to yesterday’s closing price of $29.45, yet still lower than this year’s peak of $54.45.
Jeffrey at SunTrust said management and the board may demand between about $49 and $66 a share, a potential “impediment to a takeover.”
Buyers may be leery of taking on VeriFone out of concern that Square and other newcomers will erode the value of its business, Taulli said. Square, which makes small devices that plug into mobile phones or tablet computers to allow vendors to swipe credit cards, raised $200 million from investors including Starbucks Corp. in August. The investments gave San Francisco- based Square a valuation of $3.25 billion, a person with knowledge of the matter said at the time.
“VeriFone is definitely vulnerable to attack,” Taulli said. “Why buy a company that’s under attack and could evaporate? Do you want to buy an asset that might lose value?”
Still, shareholder Rudow said VeriFone remains attractive for an acquisition because its leading industry position is buttressed by more secure software and Square is focused on smaller vendors. VeriFone has taken competition from Square head on through its acquisitions such as Global Bay Mobile Technologies Inc., he said.
“Everybody’s talking as if VeriFone is going to be disintermediated at some point, and I just don’t see it,” Thrivent’s Rudow said. “VeriFone is very well positioned regardless of whether it’s going to be mobile payment, wallet payment or NFC. You take all of that and look at the valuation on top of it. The valuation seems ridiculously low.”